Sipp uptake looks set to increase dramatically, says John Moret, director of sales and marketing at Suffolk Life, creating exciting opportunities for advisers
In the last few days I've had reason to think long and hard about the future of the Sipp market. Following a presentation to a number of financial advisers on "Sipps after A-Day" in London, I attended a seminar by a leading research agency that included two talks on the wrap and Sipp markets. The following day I chaired the annual Henry Stewart Sipp and Retirement options conference, which was attended by around 180 adviser and provider delegates.
What follows are some reflections based on what I said and heard during almost two days focused analysis on the Sipp and related markets.
Encouragingly there was an almost uniform view that the Sipp market is set to grow, fuelled by a number of influencing factors, which collectively suggests that we can expect to see some major changes in the structure of the UK pensions market over the next five years. That is in spite of the apparent threat posed by the introduction of personal accounts as proposed in the recent pensions White Paper.
From the research agency seminar I gleaned that for the first time over 1% of the investing population in the UK now has a Sipp. The investing population is basically anyone who owns investments other than just a UK bank account. Speakers at the Henry Stewart conference suggested we could see the figure grow dramatically over the next three to five years.
Indeed, I suggested that a figure in the range of 5%-10% was perfectly feasible. Recent surveys have indicated that there are around 150,000 Sipps in the UK. That would lead to a Sipp market of between 750,000 and 1.5 million Sipps by 2010.
A realistic figure
Certainly there seemed to be a genuine belief that this was realistic figure. Robert Hudson from the strategic business consultancy Adnitor suggested that we were likely to see the emergence of a two-tier Sipp market as a result of a shift to growing personal responsibility for pensions saving.
He suggested that an increasing number of employers may offer access to a lower cost 'simple Sipp' to part or all of their employees on a with or without advice basis. In addition, the advent of full concurrency suggests there will be growing demands on advisers for advice in this area with increased use of Sipps as 'bolt-on' products. This simple Sipp will be heavily technology-based in order that high volumes can be administered. The other Sipp proposition will be much closer to the current bespoke model with a full range of investment options, discretionary services and will require specialist technical and administrative skills.
I think it is hard to argue with this analysis. Most of the factors that have contributed to the growth of Sipps, such as the dissatisfaction with traditional pension products and the accelerating demise of final salary schemes, seem set to continue. In addition, other A-Day-related changes - such as the higher annual contribution limits, the additional flexibility and options around drawing income and the opportunity to undertake connected investment transactions - will all drive further growth. The big growth in terms of numbers is likely to come from the simple Sipp market but, because of its vastly higher average fund size, the bespoke Sipp will provide greater growth from an asset perspective.
This leads naturally to the likely interaction and overlap between Sipps and wraps. Listening to experts from Standard Life and Fundsdirect the message seemed to be that while a wrap requires a Sipp component, Sipps don't require a wrap. Integrated technology is key to any wrap proposition whereas with Sipps there is still a heavy dependence on experience and human knowledge. That distinction suggests that over time the simple Sipp will be relatively easily accommodated within a wrap platform. However, the bespoke Sipp may still thrive in isolation of many wrap platforms, particularly where wider range investments such as commercial property are accommodated.
With the latter in particular we are moving towards the era of true cradle-to-grave planning and construction and implementation of the right investment strategy, which will need to be reviewed regularly and potentially changed as a result. The various investment experts that participated in the events all made the point that the correct asset allocation is crucial particularly when one moves into the decumulation phase where income is drawn or possibly an annuity is purchased on a phased basis. The experts acknowledged that in this area A-Day has brought in new options and opportunities.
"Transitioning into retirement", was the way that Billy Burrows described it, making the point that a client's circumstances and attitude to risk may well change dramatically during this part of the pensions lifecycle. Flexibility and choice will be key ingredients of any investment strategy during this period - which again points to the potential use of Sipps.
The good news for advisers is that both in the accumulation phase and in the run-up and during the taking of benefits, good quality advice is going to be crucial. As fund sizes grow and the choices become more complex, investors are more likely to seek advice. With increased longevity and the opportunity to continue to be involved with the transfer and disposal of death benefits to the next generation, the potential income stream for advisers with the right level of pensions knowledge and investment skills looks set to grow significantly.
Clouds on the horizon
There are a few clouds on the horizon. There is a big question mark over whether current Sipp providers have the resources and infrastructure to cope with the predicted growth in the short term at least. The regulation of Sipps from April 2007 will also introduce some new requirements for operators of Sipps that may well lead to some consolidation. These two factors may well lead to growth in the short term being slower than one might otherwise project.
However, in the medium term it seems very clear that the demand for Sipps is set to increase dramatically creating some exciting opportunities for providers and advisers. It appears that the impact of the withdrawal of residential property and 'exotica' from the post-A-Day investments that can be held within a Sipp without incurring penal tax charges may not be as great as was originally feared. The future still looks exceedingly rosy for advisers and providers geared up for growth.
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